Ngai Hing Hong (HKG:1047) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Ngai Hing Hong's (HKG:1047) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ngai Hing Hong, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = HK$66m ÷ (HK$1.0b - HK$459m) (Based on the trailing twelve months to December 2020).

So, Ngai Hing Hong has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.5% it's much better.

See our latest analysis for Ngai Hing Hong

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ngai Hing Hong's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Investors would be pleased with what's happening at Ngai Hing Hong. The data shows that returns on capital have increased substantially over the last five years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 20%. So we're very much inspired by what we're seeing at Ngai Hing Hong thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Ngai Hing Hong has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Ngai Hing Hong's ROCE

All in all, it's terrific to see that Ngai Hing Hong is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Ngai Hing Hong, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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